The U.S. economy contracted for a second straight quarter, sounding the alarm about a possible recession as the country grapples with runaway inflation and rising interest rates.
Top economists don’t believe a slowdown has begun, but some predict a mild slowdown is likely early next year.
Residential investment plunged in the last quarter as the housing market slumped amid a sharp rise in mortgage rates, while storage and business investment also fell, more than offsetting a modest advance consumer spending.
The country’s gross domestic product, the value of all goods and services produced in the United States, fell at a seasonally-adjusted annual rate of 0.9% during the April-June period, the department said Thursday. Trade. This followed a 1.6% drop earlier this year. Economists polled by Bloomberg were expecting a 0.5% rise in GDP.
The second straight quarterly drop in output hits an informal recessionary threshold, but not the criteria relied on by the National Bureau of Economic Research. The nonprofit group defines a recession as a significant drop in a wide range of economic activity, including employment, retail sales and industrial production.
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Employers added a robust 372,000 jobs in June and an average of 457,000 a month so far this year, making it unlikely a slowdown is already underway, economists say, although payroll gains have slowed from a record monthly pace of 562,000 in 2021.
Last year, as COVID-19 vaccinations increased and businesses reopened more fully after pandemic-induced shutdowns, the economy grew 5.7%, the highest since 1984.
Moreover, the main reason for the drop in GDP in the last quarter is the slowdown in inventory building by businesses, a volatile category that does not reflect the fundamental health of the economy. Similarly, production fell in the first quarter due to inventories and trade, another category subject to large fluctuations.
“Economic growth slowed in the first half 2022, but the US economy is not in recession,” says Gus Faucher, chief economist at PNC Financial Services Group.
Yet there is little doubt that the economy is shifting into low gear and entering a perilous period. Inflation hit a 40-year high of 9.1% in June and the Federal Reserve is trying to combat soaring prices by aggressively raising interest rates in a campaign that could trigger a recession.
Goldman Sachs predicts a 30% chance of a slowdown over the next year, while Wells Fargo predicts a mild recession in early 2023.
In the second quarter, inflation-adjusted domestic final sales excluding trade, inventories and government purchases remained stable after rising 3% in the first three months of the year. In other words, consumer and business spending – the engine of the economy – is running out of steam.
Economists expect growth of 2% this year and 1.1% in 2023, according to a survey by Wolters Kluwer Blue Chip Economic Indicators.
The main culprit for the second-quarter contraction was a sharp decline in business storage. Businesses increased inventories more slowly or reduced them, reducing growth by more than 2 percentage points.
Companies excessively increased their inventories last year to deal with long-standing bottlenecks in the supply chain and product shortages. Many retailers now have too many products and should give buyers big discounts to unload the goods.
Meanwhile, home construction and renovation fell 14% after a 0.4% gain in the previous quarter.
The Fed’s rate hikes propelled mortgage rates higher, pushing down home sales and construction. 30-year fixed mortgage rates have climbed to an average of 5.54% from 3.22% at the start of this year.
How other parts of the economy fared:
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Consumer spending increases slightly
Americans are retreating as spikes in gas, food and rent prices force them to limit discretionary purchases, but they have still shown resilience. Consumer spending, which accounts for 70% of economic activity, rose 1% after adjusting for inflation after rising 1.8% at the end of last year.
Despite the fiscal squeeze, households continue to be buoyed by strong job growth and more than $2 trillion in savings accumulated during the pandemic. And as coronavirus fears fade, consumers continue to shift their spending from goods to summer travel and other services.
But the cushion is thinning. By comparison, spending jumped to a double-digit pace in early 2021 as the economy reopened and federal stimulus spurred purchases.
Business investment falls
Business investment edged down 0.1% after a 10% gain in the previous quarter. Recession concerns are prompting many companies to pull back and cut spending.
Spending on computers, delivery trucks, factory machinery and other equipment fell 2.7%.
Spending on buildings, oil rigs and other structures fell 11.7%, the fifth consecutive quarterly decline. Investments in intellectual property partly offset the decline, up 9.2%.
Trade supports GDP, for once
After having considerably dampened growth at the start of the year, trade was very positive in the last quarter.
Exports jumped 18% as US manufacturers took advantage of easing supply tensions.
Meanwhile, imports rose just 3.1% as consumers who splurged on TVs, sofas, appliances and other goods during the pandemic began to pull back.
The combination of booming exports and falling imports reduced the trade deficit, boosting overall growth.
Public spending falls again
Public spending fell for the third consecutive quarter. Federal spending fell 3.2% and state and local purchases fell 1.2%.
